Understanding business loan terminology helps you navigate financing options more effectively. This comprehensive glossary explains the most important terms business owners should know.

Amortization

The process of spreading loan repayment over time through regular payments. Each payment includes both principal and interest, with more going to interest early in the loan term.

APR (Annual Percentage Rate)

The true yearly cost of borrowing, including interest and fees. APR provides the best way to compare loan costs between different lenders and loan products.

Balloon Payment

A large final payment due at the end of a loan term. Balloon payments often occur with short-term loans where monthly payments don't fully repay the principal.

Capital

Financial resources available for business operations, investment, or growth. Working capital specifically refers to funds used for daily operations.

Collateral

Assets pledged as security for a loan. If the borrower defaults, lenders can seize collateral to recover losses. Common collateral includes real estate, equipment, and accounts receivable.

Debt Service Coverage Ratio (DSCR)

A measure of cash flow available to cover debt payments. DSCR is calculated by dividing net operating income by total debt service. Lenders typically require DSCR of 1.2 or higher.

Default

Failure to repay a loan according to agreed terms. Default triggers penalties, damage to credit, and potential legal action or collateral seizure.

Factor Rate

A multiplier used to calculate total repayment for some financing products, especially merchant cash advances. A factor rate of 1.3 means repaying 130% of the amount borrowed.

Guarantee

A promise to repay a loan if the primary borrower defaults. Personal guarantees are commonly required from business owners for small business loans.

Interest Rate

The percentage of principal charged by lenders for using their money. Interest rates may be fixed (constant) or variable (fluctuating with market rates).

Line of Credit

Revolving credit that can be borrowed, repaid, and borrowed again up to a credit limit. Interest is charged only on the amount drawn.

Loan-to-Value Ratio (LTV)

The loan amount as a percentage of the asset value being financed. Higher LTV means more risk for lenders, often resulting in higher rates.

Net Operating Income (NOI)

Revenue minus operating expenses, excluding taxes and interest. NOI is used to evaluate property financing and business cash flow.

Points

Upfront fees charged by lenders, typically 1-3% of loan amount. Each point equals 1% of the loan. Points may be negotiable.

Principal

The original loan amount borrowed, not including interest or fees. Monthly payments reduce principal over the loan term.

Refinancing

Replacing an existing loan with a new one, typically to secure better terms, lower payments, or change loan structure.

Security Agreement

A legal document granting lenders rights to collateral if borrowers default. Security agreements must be properly filed and documented.

Term Loan

A traditional loan with set repayment schedule over a specific period. Term loans typically have fixed monthly payments and interest rates.

Working Capital

Current assets minus current liabilities. Working capital measures short-term liquidity and ability to meet obligations.

Conclusion

Understanding these terms helps business owners communicate effectively with lenders and make informed financing decisions.